John Neff made his name while managing the Windsor fund from 1964 to 1995. During his tenure, he successfully posted a 57-fold increase for every dollar invested in his fund. The fund?s annualised return of 13.7% handily beats the S&P?s return of 10.6% over the same timeframe.
In his book John Neff on Investing, the investing master laid out seven principal elements of his investing style. Three of these elements are particularly useful to help us find our next potential winner. From these principles, three criteria…
John Neff made his name while managing the Windsor fund from 1964 to 1995. During his tenure, he successfully posted a 57-fold increase for every dollar invested in his fund. The fund’s annualised return of 13.7% handily beats the S&P’s return of 10.6% over the same timeframe.
In his book John Neff on Investing, the investing master laid out seven principal elements of his investing style. Three of these elements are particularly useful to help us find our next potential winner. From these principles, three criteria can be created to screen the market for opportunities.
a) Low Price-to-Earnings (P/E) ratio
The current price-to-earnings ratio for the SPDR Straits Times Index ETF (SGX: ES3) is around 13.9. Neff preferred a PE ratio that was lower than the overall market, as it could provide excellent upside participation and protection against the downside. Therefore, our first criteria would be a PE ratio of less than 13.9.
b) Fundamental Growth in excess of 7%
In his second principle, Neff demanded persistent increments in earnings growth of between 7% and 20%. He felt that growth rates higher than 20% carried too much risk and might not be sustainable. With persistent increments in mind, we can use the historical five year annualized EPS growth within the same range, as our second criteria.
c) Yield Protection
One defining approach of John Neff was his insistence for a dividend. As he saw it: “a superior yield at least lets you snack on the hors d’oeuvres while waiting for the main meal”. The current yield for the SPDR Straits Times Index ETF is about 2.7%. This will form our third criteria for a yield that is higher than the index.
Using these criteria, the following three companies made the cut. The trio, with their respective scores, is summarized below:
|Company Name||P/E||5-year EPS Growth||Dividend Yield|
|DBS Group Holdings (SGX: D05)||10.78||7.11%||3.38%|
|Nera Communications (SGX: N01)||12.46||18.21%||7.79%|
|Sembcorp Industries (SGX:U96)||11.85||9.92%||2.76%|
Source: Google Finance
DBS Group Holdings is the largest listed bank in Singapore. It derives the bulk of its income from Singapore, Hong Kong, China and South-East Asia. In the last quarter, its EPS grew by 12.8%. It is currently paying a dividend of S$0.56 per share and has a market cap of $42.3b.
Nera Communications is involved in a variety of telecommunication and infocomm solutions. The increasing revenues from its point-of-sales solution have helped propel its EPS by 20.9% in 2013. Nera paid a total dividend of S$0.06 per share in 2013.
Utility and marine giant Sembcorp Industries has operations around the globe. The $9.7b company derives 39% of its net profits from its Marine operations and 47% from its Utilities segment. It increased its EPS by 2.2% last year and paid a total dividend of S$0.17 per share in 2013.
There are currently over 700 companies listed in the SGX. Studying every company might prove too challenging for the private investor. But using Neff’s principles could help narrow the field to just a few.
While the three criteria might not guarantee a winning stock every time, it could help us focus on opportunities that the market presents. In doing so, we could stand a better chance of matching the investing master’s enviable record.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool contributor Hui Leong Chin doesn’t own shares in any companies mentioned.